PROFITEERING ON TROLLY BAGS : VIOLATION OF SECTION 171 OF CGST ACT

[Dr. Sanjiv Agarwal]

The National Anti-profiteering Authority (NAA) recently confirmed the profiteering charges in contravention of section 171 of the CGST Act, 2017 where prices were not reduced by the supplier of trolly bags on reduction of GST rates. The product in this case was American Tourist hard trolly (consumer durable) and NAA Order dated 28.04.2020 confirmed the violation of section 171 read with rules 128 to 136. [SH. RAHUL SHARMA, M/S LOCAL CIRCLES INDIA PVT. LTD., DIRECTOR GENERAL OF ANTI-PROFITEERING, CENTRAL BOARD OF INDIRECT TAXES & CUSTOMS, VERSUS M/S. SAMSONITE INDIA - 2020 (5) TMI 286 - NATIONAL ANTI-PROFITEERING AUTHORITY ].

In the instant case, a complaint was filed alleging profiteering by the Respondent in respect of “American Tourister Sky Tracer HL Blue 68 cm Hard Trolley” which was being supplied by the Respondent.  It was alleged that the Respondent did not reduce the selling price of the above product when the GST rate was reduced from 28 % to 18% w.e.f. 15.11.2017, vide Notification No. 41/2017-Central Tax (Rate) dated 14.11.2017 and he had kept the MRP of the above product unchanged at ₹ 9100/- and thus, the benefit of reduction in the GST rate was not passed on to the recipients by way of commensurate reduction in its price.

The matter was referred to DGAP for investigation who covered the period from 15.11.2017 to 31.03.2019 and submitted its report dated 24.09.2019 to NAA.

The Respondent was engaged in the design, manufacturing and sale of luggage and luggage accessories. He was selling hard and soft luggage carrying items, duffels, small bags, briefcases, laptop bags, laptop strollers and backpacks, wallets, belts and travel accessories etc. through various channels. It was engaged in the business of volatile products having a moderate shelf life requiring him to launch new product lines on a constant basis. He was also conducting end of season sales twice in a year, for which a fresh line of different products was being introduced every time and considering the same he had introduced a new product line post 15.11.2017.

It submitted that export sales, supply to Canteen Stores Department (CSD), scrap sales, stock transfer, new Stock Keeping Units (SKU) introduced after 15.11.2017 and discounts by way of credit notes should be deducted while investigating the profiteering. Further, since  it was selling his products through different channels in the market like Franchisees, Hyper Markets, Departmental Stores, E-commerce platforms, Institutional sales and CSD etc. and the pricing pattern was different for each channel and hence, the pricing for one channel should not be adopted for the pricing of another, for the purpose of arriving at the profiteering in terms of Section 171 of CGST Act, 2017.

DGAP observed that  the legal requirement in the event of benefit of ITC or reduction in rate of tax was that there must be a commensurate reduction in the prices of the goods or services. Such reduction could only be in terms of money, so that the final price payable by a recipient got reduced commensurate with the reduction in the tax rate or benefit of ITC. This was the only legally prescribed mechanism to pass on the benefits of ITC or reduction in the rate of tax to the recipients under the GST regime and there was no other method which a supplier could adopt to pass on such benefits.

However, the Respondent’s contention that his products were sold through different channels in the market like Franchisees, Hyper Markets, Departmental Stores, E-commerce platforms, Institutional sales and CSD etc. and the pricing pattern was different for each channel, therefore, the pricing for one channel should not be adopted for the pricing of another appeared to be proper.

On exclusion of discounts from value of supply, DGAP observed that since the Respondent had failed to give proof of satisfaction of the conditions mentioned in Section 15 (3) (b) above, thus, the discounts given through credit notes were not liable to be excluded from the value and hence the benefit of discounts could not be given to the Respondent. The DGAP also contended that the methodology adopted for determining the amount of profiteering could be explained by illustrating calculation made in respect of a specific item i.e. “AMT Preston SP67 Oxford Blue” product sold through a particular channel i.e. Franchisee.

The Respondent did not reduce the selling price of the “AMT Preston SP67 Oxford Blue” product when the GST rate was reduced from 28% to 18% w.e.f. 15.11.2017, vide Notification No. 41/2017 Central Tax (Rate) dated 14.11.2017 and hence profiteered an amount of ₹ 494.80 on a particular invoice of channel “Franchisee” and thus the benefit of reduction in the GST rate was not passed on to the recipients by way of commensurate reduction in the price, in terms of Section 171 of the CGST Act, 2017. Profiteering in case of all impacted goods of the Respondent for the period from 15.11.2017 to 31.03.2019 has been computed in the similar manner for each channel of sale, separately. He has further submitted that the average base prices for others channels would be different from the channel and accordingly, profiteering was been calculated channel-wise.

The issue to be settled was the determination and quantification of profiteering by the Respondent, due to his failure to pass on the benefit of the reduction in the rate of GST on the goods supplied to his recipients, in terms of Section 171 of the CGST Act, 2017.

The Respondent has increased the base prices of the goods when the rate of GST was reduced from 28% to 18% w.e.f. 15.11.2017, therefore, the commensurate benefit of GST rate reduction was not passed on to the recipients. The DGAP, on the basis of the aforesaid pre and post-reduction GST rates and the details of the outward taxable supplies (other than zero rated, nil rated and exempted supplies) of the impacted products during the period from 15.11.2017 to 31.03.2019, as furnished by the Respondent, has calculated the amount of net higher sales realization due to increase in the base prices of the impacted goods, despite the reduction in the GST rate from 28% to 18% or in other words, the profiteered amount as ₹ 25,73,82,482/-.

DGAP therefore, concluded that the profiteered amount was arrived at by comparing the channel-wise average of the base prices of the impugned products sold during the period from 01.07.2017 to 14.11.2017, with the actual invoice-wise base prices of such products sold during the period from 15.11.2017 to 31.03.2019. The excess GST so collected from the recipients, has also been included in the aforesaid profiteered amount as the excess prices collected from the recipients also included the GST charged on the increased base prices. The State / UT wise amount was also computed.

The allegation that the base prices of the goods were increased when there was reduction in the GST rate from 28% to 18% w.e.f. 15.11.2017, so that the benefit of such reduction in GST rate was not passed on to the recipients by way of commensurate reduction in prices appeared to be correct and from the details furnished in Annexure-18, it appeared that the base prices of the goods under investigation were indeed increased post GST rate reduction w.e.f. 15.11.2017. Thus, by increasing the base prices of the goods consequent to the reduction in the GST rate, the commensurate benefit of reduction in the GST rate from 28% to 18%, was not passed on to the recipients and the total amount of profiteering covering the period from 15.11.2017 to 31.03.2019 has been worked out by the DGAP as ₹ 25,73,82,482/-.

The NAA considered the DGAP report and the submissions of respondent. The NAA concluded that it was established that the Respondent had acted in contravention of the provisions of Section 171 of the CGST Act, 2017 and has not passed on the benefit of reduction in the rate of tax to his recipients by commensurate reduction in the prices. Accordingly, the amount of profiteering was determined as ₹ 25,73,82,482/- as per the provisions of Rule 133 (1) of the CGST Rules, 2017 and the Respondent was directed to reduce the prices of his products as per the provisions of Rule 133 (3) (a) of the CGST Rules, 2017, keeping in view the reduction in the rate of tax so that the benefit is passed on to the recipients. Further, it was also directed to deposit the profiteered amount of ₹ 25,73,82,482/- along with the interest to be calculated @ 18% from the date when the above amount was collected by him from the recipients till the amount is deposited in terms of the Rule 133 (3) (b) of the CGST Rules, 2017. Since, the recipients in this case were not identifiable, the Respondent was directed to deposit the amount of profiteering of ₹ 25,73,82,482/- along with interest in the CWFs of the Central and the concerned State Governments as per the provisions of Rule 133 (3) (c) of the CGST Rules, 2017 in the ratio of 50:50 along with interest @ 18%, till the same is deposited. Accordingly, an amount of ₹ 12,86,91,241/- was to be deposited in the Central CWF while the balance to be deposited in the State CWFs.

The said amount shall be deposited within a period of 3 months by the Respondent, from the date of receipt of the order, failing which the same shall be recovered by the concerned Commissioners of the Central and the State GST, as per the provisions of the CGST/SGST Acts, 2017 under the supervision of the DGAP and shall be deposited as has been directed.

Further, since the Respondent had denied the benefit of rate reduction of the GST to the consumers in contravention of the provisions of Section 171 (1) of the CGST Act, 2017 and had thus resorted to profiteering, it had committed an offence under Section 171 (3A) of the CGST Act, 2017 and therefore, it was apparently liable for imposition of penalty under the provisions.

The NAA order also mentioned that  as per the provisions of Rule 133 (1) of the CGST Rules, 2017 this order was to be passed on or before 24.03.2020 as the investigation Report was received from the DGAP on 25.09.2019. However, due to the COVID-19 pandemic prevailing in the country the order could not be passed on or before the above date.

Before High Court

The company had filed a writ petition [(W.P. (C) 4131 /2020] before Delhi High Court against the NAA Order. Pending writ petition challenging constitutionality and legality of National Anti-Profiteering Authority, petitioner-assessee has been allowed to deposit principal profiteered amount in installments.

The supplier has preferred a writ petition against Union of India challenging the constitutional validity of section 171 of CGST Act, 2017 and rules made there under on the ground that in absence of any methodology prescribed, entire exercise before the NAA was violative of natural justice. The Delhi High Court allowed the company to pay the profiteered amount as determined by the NAA in installments till January, 2021 in view of Covid-19 pandemic. The penalty and interest proceedings were stayed. [M/S. SAMSONITE SOUTH ASIA PVT. LTD. VERSUS UNION OF INDIA & ORS. - 2020 (7) TMI 526 - DELHI HIGH COURT].

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